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Business & Corporate Planning

Limited Liability Company

The limited liability company, or LLC, is among the newest forms of business organization in the United States. Conceptually, the LLC is designed to combine the best features of a corporation and a general partnership while minimizing the disadvantages of those forms of organization.

Like the shareholders of a corporation, the owners of an LLC, called “members,” have limited liability for the LLC's torts and contracts; the liability of an LLC member is limited to the amount of his or her capital contribution. Like a general partnership, the LLC is easy and inexpensive to form and manage, requiring little corporate-style formality. Like a general partnership and a Subchapter “S” corporation, the LLC is not taxed as an “entity” for federal or state income tax purposes; profits and losses “pass through” to the members in accordance with their percentage allocation of profits and losses.

Unlike a limited partnership, all members enjoy limited liability whether or not they participate in the management and operation of the LLC business. Unlike a Subchapter “S” corporation, there are no restrictions on the number of permitted classes of stock or the identities of the shareholders. A foreign national, for example, may be a member of an LLC but cannot be a shareholder of a Subchapter “S” corporation.

Corporations

A corporation is a legal entity created through the laws of its state of incorporation. Individual states have the power to promulgate laws relating to the creation, organization and dissolution of corporations. Many states follow the Model Business Corporation Act. State corporation laws require articles of incorporation to document the corporation's creation and to provide provisions regarding the management of internal affairs. Most state corporation statutes also operate under the assumption that each corporation will adopt bylaws to define the rights and obligations of officers, persons and groups within its structure. States also have registration laws requiring corporations that incorporate in other states to request permission to do in-state business.

There has also been a significant component of Federal corporations law since Congress passed the Securities Act of 1933, which regulates how corporate securities are issued and sold. Federal securities law also governs requirements of fiduciary conduct such as requiring corporations to make full disclosures to shareholders and investors.

The law treats a corporation as a legal “person” that has standing to sue and be sued, distinct from its stockholders. The legal independence of a corporation prevents shareholders from being personally liable for corporate debts. It also allows stockholders to sue the corporation through a derivative suit and makes ownership in the company (shares) easily transferable. The legal “person” status of corporations gives the business perpetual life; deaths of officials or stockholdersdo not alter the corporation's structure.

Corporations are taxable entities that fall under a different scheme from individuals. Although corporations have a “double tax” problem --both corporate profits and shareholder dividends are taxed -- corporate profits are taxed at a lower rate than rates for individuals.

Corporate law has important intersections with contracts and commercial transactions law.

Partnerships

A partnership is a for-profit business association of two or more persons. Because the business component is defined broadly by state laws and because “persons” can include individuals, groups of individuals, companies, and corporations, partnerships are highly adaptable in form and vary in complexity. Each partner shares directly in the organization's profits and shares control of the business operation. The consequence of this profit sharing is that partners are jointly and independently liable for the partnership's debts.

Creation, organization, and dissolution of partnerships are governed by state law. Many states have adopted the Uniform Partnership Act. A partner relationship is generally the result of a contract either express or implied with no formal requirements (such as a signed document). To determine whether a partnership exists courts look at: (1) intention of the parties, (2) sharing of profits and losses (3) joint administration and control of business operation, (4) capital investment by each partner, and (5) common ownership of property.

Under state agency law, partners are personally liable for torts committed by the partnership and its agents. (This is not the case of a limited partnership where one or more general partners manage business operations and assume personally liable for partnership debts while other contributing/profit sharing partners take no part in running the business and incur no liability beyond contribution obligations.) Limited partnerships are governed in many states by the Revised Uniform Limited Partnership Act. State property law also impacts partnerships by defining ownership in a partnership and determining how the death of a partner changes the partnership structure.

Federal law plays a minimal role in partnership law except in the context of a diversity action, or in instances where a partnership agreement contains an effective choice-of-law provision designating the application of federal law. Federal law also governs whether a partnership exists for federal tax purposes.

For state and federal tax purposes, a partnership is not a taxable entity. Partnership income is taxable to the partners in proportion to their share in the company's profits.

Purchase & Sale of Business

Succession planning involves transferring ownership and control of a business to new management. The three main options are: transferring ownership to a family member, transferring ownership to a non-family member or disposing of the business through a sale, management buy-out, management buy-in or voluntary liquidation.

Business Transfer Planning

Succession planning involves transferring ownership and control of a business to new management. The three main options are: transferring ownership to a family member, transferring ownership to a non-family member or disposing of the business through a sale, management buy-out, management buy-in or voluntary liquidation.

The buy-sell agreement among shareholders will help with the succession planning as well as business valuation.

Contracts

Contracts are promises that the law will enforce. The law provides remedies if a promise is breached or recognizes the performance of a promise as a duty. Contracts arise when a duty does or may come into existence, because of a promise made by one of the parties. To be legally binding as a contract, a promise must be exchanged for adequate consideration. Adequate consideration is a benefit or detriment which a party receives which reasonably and fairly induces them to make the promise/contract. For example, promises that are purely gifts are not considered enforceable because the personal satisfaction the grantor of the promise may receive from the act of giving is normally not considered adequate consideration. Certain promises that are not considered contracts may, in limited circumstances, be enforced if one party has relied to his detriment on the assurances of the other party.

Contracts are mainly governed by state statutory and common (judge-made) law and private law. Private law principally includes the terms of the agreement between the parties who are exchanging promises. This private law may override many of the rules otherwise established by state law. Statutory law may require some contracts be put in writing and executed with particular formalities. Otherwise, the parties may enter into a binding agreement without signing a formal written document. Most of the principles of the common law of contracts are outlined in the Restatement Second of The Law of Contracts (http://www.ali.org/ali/contract.htm) published by the American Law Institute. The Uniform Commercial Code, whose original articles have been adopted in nearly every state, represents a body of statutory law that governs important categories of contracts.

Mergers & Acquisitions

A “Corporate Merger” is the combination of the assets and liabilities of two firms to form a single business entity. In everyday language, the term “acquisition” tends to be used when a larger firm absorbs a smaller firm, and “merger” tends to be used when the combination is portrayed to be between equals.

The success of a merger is measured by whether the value of the acquiring firm is enhanced by it. Often, this requires the evaluation of a third, disinterested party, like your attorney or accountant, to evaluate the feasibility of doing the merger or acquisition.

Reorganizations & Conversions

In today's ever-changing business world, a corporation often needs to reconstruct its form for economic survival and growth. One role of the estate planning attorney is to help evaluate corporate structures for estate planning, asset protection, and liability insulation purposes. Corporate reorganizations usually involve exchanges of stock and property, and normally would be taxable transactions. However, Congress enacted certain provisions that allow for non-recognition of gain or loss in certain types of corporate reorganizations to ensure that the tax laws would not impede corporate realignments.

Under recent law in many states, most entities can be converted into other entities, such as a corporation into a limited liability company, by a stream-lined statutory conversion procedure.

PLEASE NOTE: To the extent that this website contains tax related matters, it is not intended to be used for the purpose of avoiding penalties that may be imposed by law.

For more information regarding your legal questions, please call us at (954) 772-8050.